The FSB has proposed the term sheet and overall structure for a layer of “total loss-absorbing capacity” (TLAC) riding above regulatory capital to ensure that, under stress, the largest cross-border banks can be resolved at long-term cost only to creditors and shareholders. Global systemically-important banks (G-SIBs) would be required to hold TLAC in the form of equity and eligible debt so that shareholders and unsecured creditors would take enough risk upon insolvency that resolution authorities can establish a bridge entity or otherwise dispose of a troubled G-SIB without resort to taxpayer bail-outs.
However, as discussed below, many questions remain before the FSB will complete the TLAC standards, with the consultation detailing an array of concerns such as the extent to which TLAC could so burden G-SIBs as to drive them out of businesses at cost to customers and market efficiency or to the benefit of non-banks for which TLAC is planned, but far from likely. Weighed against this is the significant benefit of reducing financial crises, protecting taxpayers, and de-coupling G-SIBs from sovereign governments in the “doom loop.” Other questions to be resolved before TLAC is finalized include the extent to which these requirements will promote cross-border resolutions or lead to ring-fencing, the ability of non-U.S. G-SIBs to form the holding companies needed to issue effective TLAC, the extent to which investors outside G-SIBs will wish to hold TLAC, and whether any amount of TLAC will be sufficient in a systemic crisis involving more than one G-SIB or in the event that major counterparties do not stay their close-out rights. As a result, TLAC as proposed builds out the FSB’s resolution framework as a way of ending too big to fail (TBTF) banks, but it is hard to determine yet if it will prove the “watershed” some have called it as a defining policy that will indeed ensure this.
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